The euro sank to a two-month low yesterday in a nervous first reaction to a multibillion-dollar bailout for Ireland that European governments hoped would steady the under-pressure currency.
Finance ministers who sealed the 85 billion euro (US$113 billion) deal at emergency talks in Brussels on Sunday were anxious to reassure Asian markets and head off any moves on Portugal and Spain, which are considered the next most vulnerable economies, but even as international financial leaders stepped forward to endorse the agreement, currency dealers in Tokyo gave their own verdict.
After early gains, the euro slipped to US$1.3181 yesterday, its lowest level since late September, before rebounding above US$1.32 in a volatile session.
Under the deal, Ireland’s crippled banks will immediately receive 10 billion euros, but will be subject to a “fundamental downsizing,” the Irish government said.
They will be able to draw on a total of 35 billion euros out of 67.5 billion euros in external aid from the EU and the IMF, but the first 17.5 billion euros comes from an Irish “treasury cash buffer and investments of the National Pension Reserve Fund,” an EU statement said.
Irish Prime Minister Brian Cowen said he had got “the best deal available” for Ireland and its people, a day after mass street protests in Dublin against austerity cutbacks introduced to qualify for the bailout, but opposition leaders denounced the deal.
Tens of thousands of protesters had already marched in Dublin on Saturday to protest against the agreement, but business leaders welcomed the deal.
Central Bank of Ireland Governor Patrick Honohan said the international support “underpins a clear economic and financial policy path for Ireland.”
Danny McCoy, head of the Irish Business and Employers Confederation, said it provided “much-needed certainty.”
Bank of France Governor Christian Noyer endorsed the plan yesterday as he spoke to reporters at a financial forum in Tokyo.
“The package has been clearly designed by the IMF and the EU, and you can rely on the multi-decade experience of the IMF to put in place plans that are totally credible,” Noyer said. “There is absolutely no doubt this plan will work.”
IMF chief Dominique Strauss-Kahn said he had no doubt Ireland would keep up its end of the deal.
“Supported by substantial financing, this program can underpin market confidence and bring Ireland’s economy back on track,” Strauss-Kahn said.
Non-euro countries the UK, Denmark and Sweden will provide bilateral loans totaling about 5 billion euros.
As part of the deal, Ireland was given an extra year, until 2015, to bring its deficit of 32 percent of GDP back within the EU’s permitted 3 percent limit.
Ireland’s coalition government unveiled a four-year plan last week that signaled spending cuts of 10 billion euros and tax rises of 5 billion euros, triggering the mass protests at the weekend.
Cowen said he expected Ireland to pay an average interest rate of 5.8 percent a year on the loans, subject to market conditions.
“Without these loans, the necessary tax increases and spending cuts would be far more severe,” Cowen said.
Brussels said it would also consider re-scheduling repayments on Greece’s 110 billion euro loans, as part of broader moves to convince bond buyers to keep interest rates at manageable levels.
Greece was the first recipient of a major bailout earlier this year.
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